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By Qianwei Fu, Jiangxiao Athena Hou and José Umbert
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We previously discussed in a June 10, 2015, guest article the basics of insurance underwriting and claim handling in China. In this article, we give an overview of the legal framework and relevant key issues in insurance coverage dispute resolution in China.[1]

China’s insurance law requires an insurance contract to contain a dispute resolution provision.[2] In China, a majority of insurance disputes are resolved by either litigation or arbitration. Mediation is often used within litigation and arbitration proceedings on a voluntary basis. The use of stand-alone institutional mediation in complex insurance disputes is not widely recognized.

Arbitration of Coverage Disputes

An effective arbitration clause must state the parties’ clear intention to submit their dispute to arbitration, the scope of matters to be arbitrated and the name of the chosen arbitral tribunal.[3] A court will not accept a case where there is a valid written arbitration agreement between parties governing the dispute.[4] As in the United States, arbitration awards in China are final and not appealable, albeit they can be set aside by courts in limited circumstances.

Arbitration has gradually gained ground for resolving insurance disputes in China. Most insurers prefer arbitration for reasons of efficiency, expertise, flexibility and confidentiality. Arbitration typically provides a speedier resolution. Arbitrators often possess industry expertise and are viewed to have a greater capability than trial judges of comprehending the insurance issues. They also have considerable flexibility in formulating an arbitral award based upon fairness. The relative privacy of the proceedings is another preferred advantage over litigation.

China has a well-established structure for resolution of commercial disputes by arbitration. The China International Economic and Trade Arbitration Commission (CIETAC) and the China Maritime Arbitration Commission (CMAC) are internationally well-recognized arbitral institutions that handle foreign-related disputes. CIETAC also arbitrates domestic commercial disputes. CMAC only hears maritime-related disputes including marine insurance disputes.[5] Similar to civil litigation rules, parties submit evidence in support of their respective arguments.[6] An arbitration tribunal can, by its own motion, collect evidence it deems necessary.[7] A party must disclose and submit to the tribunal and to the opponent all evidence on which it relies.[8]

Use of Mediation

In China, judicial mediation has been used extensively to resolve commercial disputes, including insurance disputes. The civil procedure law contains specific rules for court-conducted mediation.[9] Unlike U.S. litigation in which the court may refer the case to a neutral mediator to facilitate settlement negotiations, a judicial mediation in China is conducted by the judge presiding over the dispute. If the parties reach an agreement, the court will issue a mediation memorandum which becomes legally binding and enforceable once it has been delivered to and signed by the parties. If the mediation does not result in an agreement, the court should adjudicate the matter promptly. Similarly, arbitration tribunals may also invite parties to mediate at any time before an arbitral award is rendered.[10] If mediation is successful, the tribunal shall issue a mediation memorandum setting forth the arbitration request and the parties’ agreement. A mediation memorandum signed by the parties and the tribunal has the same binding effect as an arbitral award.

Alternatively, the China Council for Promotion of International Trade (CCPIT) offers independent commercial mediation services. As China’s largest professional mediation organization, the CCPIT has over 40 mediation centers throughout the country and mediates insurance, maritime, trade, investment, finance, transportation and other commercial disputes. The CCPIT Mediation Rules specifically prohibit information in the mediation proceedings from being made public or used in other proceedings. In practice, insurance disputes are mainly resolved by either arbitration or litigation, with integrated mediation conducted by courts or arbitration tribunals.

Suing in Court

Where to Bring a Claim

Absent an arbitration or mediation agreement, all disputes concerning insurance contracts can be brought to the court where the defendant is domiciled or where the insured object is located.[11] In property insurance disputes, if the insured subject matter is a transport vehicle or transported goods, claims can be filed with a court where the transport vehicle is registered, the transport destination or where the insured accident has occurred.[12] A plaintiff can choose to file a claim with any of the courts that have jurisdiction. If two or more courts can hear the claim, the court first seized shall have jurisdiction.

Limitation Period to Sue

The limitation period to bring insurance claims, except those related to life insurance, is two years, from the time when the insured knows or should have known the occurrence of insured event.[13] Life insurance claims have a five-year limitation period.[14] The limitation period for claims relating to maritime insurance contracts is two years, counting from the date on which the peril insured against occurred.[15]

China’s insurance law does not specify the limitation period for reinsurance disputes. The two-year limitation period for general contract disputes likely will apply. In practice, the prevailing view is that the limitation period is triggered when the primary insurer has quantified its loss under the primary insurance policy.

China’s Judicial System

China has a four-level court system. Basic People’s Courts are established at the county level or district level of large municipalities to hear most civil cases in the first instance. Intermediate People’s Courts are at prefectural level and have jurisdiction over certain important local cases in the first instance and appeals from Basic People’s Courts. High People’s Courts hear cases of first instances that have major implications at the provincial level as well as appeals from the Intermediate People’s Courts. The Supreme People’s Court is the highest judicial body, which hears appeals and supervises the administration of justice by all lower courts.

Like all civil cases, insurance litigation follows China’s two-tier trial system. A case heard in the first-instance court can be appealed as of right and the second-instance judgment automatically reaches finality and is not appealable. Most notably, China has a codified legal system based on the civil law system. Judicial decisions do not have the precedential value that bind lower courts. The Supreme People’s Court issues binding “judicial interpretations” on applications of laws which all lower courts must follow.

Applicable Law

All domestic policies are subject to Chinese law. Foreign law may apply to insurance contracts involving a foreign insured or foreign insurance subject matter (“foreign-related insurance contracts”).[16] Parties to a foreign-related insurance contract may expressly choose the applicable law, including foreign law. When both parties are Chinese nationals, Chinese law generally applies. Reinsurance contracts between a Chinese ceding insurer and a foreign reinsurer may also be subject to foreign law. The party proposing to apply foreign law has the burden to provide and prove the contents of foreign law. When the court finds it difficult to ascertain the contents of foreign law, Chinese law would apply instead.

Interpretation of Insurance Contracts

If a dispute arises over the meaning of a standard clause in the insurance contract provided by an insurer, the clause shall be interpreted in accordance with its common understanding. If a standard clause has more than one interpretation, the clause shall be construed against the insurer.[17] It is worth noting that not all insurance contracts are construed in favor of an aggrieved policyholder. In the event the parties dispute the meaning of an insurance term or condition, the court will first look at the literal meaning of the clause and explore the parties’ true intent. The court determines the actual meaning of the clause on the basis of the words and sentences used in the contract, related clauses of the contract, objective of the contract, insurance trade practices and the principle of good faith.[18] Only when there is an ambiguity would the court construe the clause in a manner unfavorable to the insurer.

Access to Evidence Discovery

The U.S. equivalent of the discovery process is not available in China. Each party is responsible for collecting and presenting evidence in support of its respective claims or defenses. Chinese law does not provide parties with the right to obtain relevant information in the possession of their opponents. As part of the pretrial preparation, the court may direct parties to disclose and exchange evidence to clarify their dispute.[19] In some limited circumstances, the court may, by its own motion or at the request of a party, investigate and collect evidence on its own.[20] The court can also issue orders to compel cooperation with court-conducted investigations or to preserve evidence.

Litigation Timescale

Chinese civil litigation is usually concluded much more quickly than U.S. lawsuits. Chinese law generally requires judges to conclude civil lawsuits within six months upon acceptance of a complaint. [21] Simplified adjudication proceedings are required to be concluded within three months. The chief justice of the court may grant one extension for no more than six months. Any further extension requires approval by the people’s court at a higher level.

Remedies

Although an insurer must act in good faith to make proper investigation of an insured’s claim and make a timely coverage determination, Chinese courts do not recognize tort liability for wrongful denial of claims. An insured is only entitled to contractual remedies if the insurer fails to act in good faith in responding to an insured’s claim or denies a claim that is not fairly disputable pursuant to the terms of an insurance policy. Such contractual remedies may include court-compelled performance, payment of insurance benefits and any damages resulting from the breach.[22] Extra-contractual or punitive damages are generally not recoverable or awarded.

Strategic Considerations in Resolving Coverage Disputes

In China, courts and arbitral tribunals take an active role in facilitating settlements between the parties by mediation. Owing to the relatively young insurance market, the experience of judges and arbitrators in handling insurance disputes varies. It is prudent to evaluate available methods of dispute resolution and choose the most suitable venue. This often means setting forth a dispute resolution mechanism and a governing law provision at the time when the insurance contract is written, with practical considerations in mind.

The lack of U.S.-style discovery makes civil litigation in China challenging. In anticipation of a coverage dispute, an insurer should take all necessary steps to preserve and obtain evidence in support of its positions. The insurer should also assess the possibility of acquiring relevant evidence through court. Compared to U.S. litigation, the shorter time frame to conclude a lawsuit, while desirable to save costs, also gives parties less time to conduct a fact investigation. Lastly, an insurer should always consider resolving coverage disputes out of court, which can often achieve cost-effective results.

—By Jiangxiao Hou, Qianwei Fu and José Umbert, Zelle Hofmann Voelbel & Mason LLP

Jiangxiao Hou was a partner and Qianwei Fu is a senior associate in Zelle Hofmann’s San Francisco office.

José Umbert is a partner in Zelle Hofmann’s London office.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] This article does not address intra-market insurance disputes or subrogation matters.

[2] China Insurance Law, Art. 18 (2015).

[3] China Arbitration Law, Art. 16 (1994).

[4] China Civil Procedure Law, Art.124 (2) (2013).

[5] CMAC Arbitration Rules, Art. 3 (2015).

[6] China Arbitration Law, Art. 43.

[7] Id.

[8] Id., Art. 45. See also CIETAC Guidelines on Evidence, Art. 4 (2015).

[9] China Civil Procedure Law, Art. 93-99.

[10] China Arbitration Law, Art. 51; see also CIETAC Arbitration Rules, Art. 47 (2015).

[11] China Civil Procedure Law, Art. 24.

[12] Interpretations of the Supreme People’s Court on the Application of the Civil Procedure Law, Art. 21 (2015).

[13] China Insurance Law, Art. 26.

[14] Id.

[15] China Maritime Law, Art. 264 (1993).

[16] See generally China Law of Application of Law for Foreign-Related Civil Relations (2011).

[17] China Insurance Law, Art. 30.

[18] China Contract Law, Art. 125 (1999).

[19] China Civil Procedure Law, Art. 133.

[20] Id., Art. 64.

[21] Id., Art. 149.

[22] China Insurance Law, Art. 23.